The South Division of Wiig Company reported the following data for the current year Sales $ 2900000 Variable costs $ 1943000 Controllable fixed cost $ 590000 Average operating costs $ 5000000 Top management is unhappy with the investment center’s return on investment (ROI). It asks the manager of the South Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. Increase sales by $300,000 with no change in the contribution margin percentage. Reduce variable costs by $150,000. Reduce average operating assets by 3%. Compute ! Compute the return on investment (ROI) for the current year. Using the ROI formula, compute the ROI under each of the proposed courses of action.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
The South Division of Wiig Company reported the following data for the current year
|
Sales |
$ 2900000 |
|
Variable costs |
$ 1943000 |
|
Controllable fixed cost |
$ 590000 |
|
Average operating costs |
$ 5000000 |
Top management is unhappy with the investment center’s return on investment (ROI). It asks the manager of the South Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action.
- Increase sales by $300,000 with no change in the contribution margin percentage.
- Reduce variable costs by $150,000.
- Reduce average operating assets by 3%.
Compute !
- Compute the return on investment (ROI) for the current year.
- Using the ROI formula, compute the ROI under each of the proposed courses of action.
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